I. Sector Landscape
The discretionary sector in Australia, representing retail trade and wholesale trade, accounted for a mammoth ~8.5% of Gross Value Added (GVA) in 2020. This translated to ~$153.7 billion in value terms. Despite the headwinds, the economy has rebounded with Gross Domestic Product (GDP) growth of 3.4% in the December 2021 quarter (QoQ). Household spending forms the cornerstone with the re-opening of borders and easing of restrictions showcased a 6.3% uptick in household spending in December 2021 quarter.
Key Trends and Drivers:
An Uptick in Monthly Business Turnover: With businesses reeling under supply chain concerns and the increasing spread of the new virus variant, the wholesale trade recorded the largest rise in business turnover in January 2022 with 7.1%. On the other hand, retail trade posted a moderate growth of 1.8%. As indicated by the household spending data, consumers were increasingly spent on clothing and footwear, furnishings, and recreational goods, with spending on goods, leaped over the pre-pandemic levels.
A Strong Growth in Retail Trade: Retail trade posted an astonishing 9.1% growth in February 2022 to reach $33.08 billion on a seasonally adjusted basis. With nil restrictions and lockdown norms, most states and territories showed an upward trend in retail sales. Sales in New South Wales and South Australia recorded the largest 3.9% and 3.1% growth, respectively, in February 2022 (over the prior month). Floods in late January 2022 affected Western Australia and the Northern Territory.
Figure 1: Retail Turnover by State-Wise:
Source: Based on the Australian Bureau of Statistics Data, Analysis by Kalkine Group
Expansion in Personal Credit: New loan commitments for personal finance rose 0.8% in January 2022 and 21.6% over the previous year. Loan commitments for road vehicles climbed 0.9%, while household and personal goods surged 19.3%. In a separate report by The Commonwealth Bank of Australia, card spending on motor vehicles, travel, health & fitness, and household services are among the top categories for February 2022.
Record Decline in Unemployment Rate: Increase in capex spending by businesses has led the unemployment rate to the record lowest level of 4.0% in February 2022. Further, the participation rate rose by 0.2% to reach 66.4%. This was higher than those levels during the start of the pandemic. Further, average weekly earnings surged 2.1% YoY to $1,748.4 in November 2021.
Figure 2: Downward Trending Unemployment Rate:
Source: Based on the Australian Bureau of Statistics Data, Analysis by Kalkine Group
Index Performance
The ASX 200 Consumer Discretionary (GIC) Index has generated a 5-year return of ~+45.34%, compared to ~+27.87% return by the ASX 200 Index. The surge in household wealth, increasing household spending assisted by wage expansion, a spurt in online sales and government supportive policies are some of the driving factors.
Figure 3: The ASX 200 Consumer Discretionary (GIC) Index outperformed ASX 200 Index in the past 5 years by whooping ~17.47%.
Source: REFINITIV as of 31 March 2022
Key Risks and Challenges
ANZ Roy Morgan Consumer Confidence Index was unchanged at 91.1 during the fourth week of March 2022. Consumer confidence dropped to a record low since the second wave of COVID-19 in Victoria in early September 2020. Increasing commodity inflation and crude price on account of the ongoing Ukraine Russia war, and widespread flooding across central and eastern Australia is expected to hit inflation at 4.5% in FY22, according to the Treasury Department. The Reserve Bank of Australia had earlier pointed out the high household debt-to-income ratio combined with rising property prices may pose threat to financial stability.
Figure 4: Key Drivers v/s Key Constraints
Source: Analysis by Kalkine Group
Outlook
Budgetary Relief: In the 2022-2023 budget, the Morrison government has provided relief to low-middle-income groups with a a$250 cost of living payment for pensioners and a $420 increase in the income tax offset. Besides, the budget cut the fuel excise by half which may boost spending.
An Uptick in Online Shopping: Online shopping continues to show momentum with 5.5 million households shopping online in January 2022, according to the Australia Post. On a YoY basis, online shopping surged 16.6% with ACT, WA, and TAS showing the fastest growth.
Rise in Private Capex Spend: Retail and Wholesale trade companies in Australia showed strong growth in private capex spending with 8.5% and 9.0% growth, respectively, in December 2021 quarter (YoY).
II. Investment theme and stocks under discussion (ING, CCX, ARB)
After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ multiple method.
1. ASX: ING (Inghams Group Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.15 billion)
ING is engaged in producing and selling chicken and turkey products across its vertically integrated production system.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 18.85% on 31 March 2022. Moreover, the stock might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple), given the gradual easing of over-supply in the wholesale market and decent inventory control. For valuation purposes, peers such as Elders Ltd (ASX: ELD), Tassal Group Ltd (ASX: TGR), Clean Seas Seafood Ltd (ASX: CSS), and others are considered. Given the decent fundamental upgrades, curtailed financial leverage, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $3.060, down by ~1.291% on 31 March 2021. In addition, the stock has delivered an annualised dividend yield of 5.06%.
ING Daily Technical Chart (Source: REFINITIV)
2. ASX: CCX (City Chic Collective Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$809.03 billion)
CCX is engaged in the retailing of women's apparel. It is a collective of consumer-led brands, including City Chic, Avenue, Evans, CCS, Hips & Curves, and Fox & Royal.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 17.67% on 31 March 2022. However, the stock might trade at some discount compared to its peers’ average EV/Sales (NTM trading multiple), given the susceptibility towards currency risks and breakage in macroeconomic links. For valuation purposes, peers such as Vita Group Ltd (ASX: VTG), Adairs Ltd (ASX: ADH), Lovisa Holdings Ltd (ASX: LOV), and others are considered. Given the considerable growth in customer base, decent profitability, strategic acquisitions, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $3.400, up by ~0.591% on 31 March 2021.
CCX Daily Technical Chart (Source: REFINITIV)
3. ASX: ARB (ARB Corporation Limited)
(Recommendation: Hold, Potential Upside: Low Single-Digit, Mcap: A$3.43 billion)
ARB is engaged in the business of designing, manufacturing, distributing, and sale of motor vehicle accessories & light metal engineering works.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 7.65% on 31 March 2022. Moreover, the stock might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple), given improved inventory levels and a strong customer order book. For valuation purposes, peers such as GUD Holdings Ltd (ASX: GUD), Pwr Holdings Ltd (ASX: PWH), Carbon Revolution Ltd (ASX: CBR), and others are considered. Given the decent fundamental uplift, upright financial position, prudent inventory management, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $41.540, down by ~1.143% on 31 March 2021. In addition, the stock has delivered an annualised dividend yield of 1.85%.
ARB Daily Technical Chart (Source: REFINITIV)
Comparative Price Chart:
Source: REFINITIV as of 31 March 2022
Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.
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